EDUCATION CENTER

Taxation of forex is confusing and uncertain in the tax code and that makes tax filings difficult for forex traders. The tax problem is that some types of forex are treated as IRC 1256 contracts with lower 60/40 tax treatment and other types of forex are treated as IRC 988 foreign currency transactions with ordinary gain or loss treatment. Plus, IRC 1256 and IRC 988 are conflicting tax-code sections.

An article by Robert A. Green, CPA of GreenTraderTax CPAs written in February, 2008.
See several earlier articles by Mr. Green on forex tax below as well.

Retail spot forex traders are different from professional forward forex traders.
The forex Interbank market has been around for many decades. Robert A. Green founded Green & Company CPAs in 1983 to handle the special tax and accounting needs of several leading professional forex traders and Interbank brokers (they used phones only before the Internet).

It's important to understand some key differences between professional forex traders and this newer breed of online forex traders.

Professional forex traders often trade "forward contracts" (rather than spot forex) because forwards have more transparency and better pricing than spot. Most professional traders in forward forex understand they are trading major currencies (for which regulated futures contracts [RFCs] exist); therefore they can claim IRC 1256 60/40 tax treatment.

Most professional forward forex traders make a good living trading forwards and they count on lower 60/40 tax rates each year (up to 12-percent lower tax rates). Remember, IRC 1256 losses may be carried back three tax years, but only applied against IRC 1256 gains in those years.

Contrast professionals with the newer breed of online forex trader. Most online forex traders are new to forex; some moved from the online securities or futures trading space. Many have very low account sizes ($2,000 to $25,000) and they lack the capital, clout and connections to trade forwards in the (non-retail) Interbank market.